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Chapter 4. Gross Income - Exclusions. Major Statutory Exclusions. Gifts and inheritances Scholarships and fellowships Life insurance proceeds Awards for Meritorious Achievement Distributions from Qualified State Tuition Programs Payments for Injury and Sickness

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chapter 4

Chapter 4

Gross Income - Exclusions

major statutory exclusions
Major Statutory Exclusions
  • Gifts and inheritances
  • Scholarships and fellowships
  • Life insurance proceeds
  • Awards for Meritorious Achievement
  • Distributions from Qualified State Tuition Programs
  • Payments for Injury and Sickness
  • Foreign earned income exclusion
major statutory exclusions cont d
Major Statutory Exclusions - cont’d
  • Employee Benefits
    • Adoption Expenses
    • Meals and Lodging
    • Meals and Entertainment
    • Dependent Care
    • Educational Assistance
    • Cafeteria Plans
  • Certain Income from discharge of indebtedness
  • Exclusion for gain from small business stock
gifts and inheritances
Gifts and Inheritances
  • Transfers of property with donative intent are excludable from gross income whether made during life (gift) or at death (inheritance)
  • Income earned from such property is subject to the income tax rules
scholarships and fellowships
Scholarships and Fellowships
  • Scholarships for tuition, fees, books, supplies, and equipment are excluded for degree candidates
  • Amounts received for room and board are includible in gross income
life insurance proceeds
Life Insurance Proceeds
  • Life insurance proceeds paid for reason of death of the insured are excludible
  • Amounts in excess of face value are taxable
  • Policies purchased from another individual treated as investment
  • If surrendered, excess of proceeds over premiums paid is taxable
    • exclusion is available for accelerated death benefits paid to terminally ill person
  • Dividends earned on life policies are nontaxable to extent of premiums paid
    • Interest earned on the dividends is taxable
awards for meritorious achievement
Awards for Meritorious Achievement
  • Awards are generally taxable
  • Awards for religious, charitable, scientific, educational, artistic, literary, or civic achievement are excluded from income if taxpayer:
    • did not enter the contest
    • is not required to perform substantial additional services
    • designates a qualified charitable organization to receive the payment
scholarships and fellowships8
Scholarships and Fellowships
  • Scholarships for tuition, fees, books, supplies, and equipment are excluded
  • Amounts received for room and board must be included in gross income
distributions from qualified state tuition programs
Distributions from Qualified State Tuition Programs
  • Distributions made from qualified state tuition programs are taxable only to the extent they exceed donor contributions
  • 2001 Tax Act
    • Expanded scope of qualified tuition plans to include private institutions
    • Distributions from state-sponsored plans will be excludable if made in 2002 and after
    • Distributions from non-state programs will be excludable if made in 2004 and after
payments for injury and sickness
Payments for Injury and Sickness
  • Amounts received for physical injury or physical sickness are excluded whether paid by insurance or from damages
  • Damages on nonphysical injury are taxable
  • Punitive damages are taxable
employee benefits
Employee Benefits
  • Adoption Expenses
    • An employee is allowed a $5,000 per child exclusion for qualified adoption expenses paid by employer
    • Exclusion increases for child with special needs and phased out at high AGI levels
    • Alternate adoption credit is available (Chapter 14)
employee benefits12
Employee Benefits
  • Meals and Lodging
    • Employer provided meals and lodging are excluded if
      • provided on the employer’s premises
      • for the convenience of the employer
      • and, for lodging to be excludible the employee is required go accept the lodging as a condition of employment
employee benefits13
Employee Benefits
  • Meals and Entertainment
    • Only 50% of the cost of meals and entertainment are excludible
  • Dependent Care
    • Up to $5,000 of dependent care provided by employer is excludible
  • Educational Assistance
    • Up to $5,250 of employer paid undergraduate educational reimbursement is excludible
    • Under the new tax law this exclusion has be extended to include graduate expenses incurred after 12/31/2001 and the provision has been made permanent
employee benefits14
Employee Benefits
  • Cafeteria Plans
    • Employees may select from cash or nontaxable fringe benefits
    • Two types of plans
      • Supplemental wage plans
      • Wage reduction plans
  • Employee Achievement Awards (non cash)
    • Awarded for length of service and safety
    • Employee achievement - limited to $400 value each
      • for length of service must be more than 5 years
    • Qualified plan awards (e.g. safety)
      • limited to $1,600 max and $400 average per employee
employee benefits15
Employee Benefits
  • Section 132 Fringe Benefits (Table I4-2)
    • No additional cost
    • Employee Discounts
      • Services limited to 20%
      • Merchandise limited to gross profit %
    • De minimis - so small accounting is unreasonable
    • Qualified transportation
      • Limited to $175/mo. parking and $65 for other
    • Recreation and athletic facilities
foreign earned income exclusion
Foreign Earned Income Exclusion
  • U.S. citizens can exclude $76,000 of foreign- earned income in 2000 in lieu of taking the foreign tax credit
  • Both spouses can take the exclusion if each has sufficient earned income
  • If change from exclusion method to credit method may not change back for 5 years without approval
  • Must prorate unless TP is resident of foreign country for entire tax year or 330 days during 12 consecutive months
  • Deductions directly attributable to foreign income are disallowed
  • Additional exclusion for high housing costs
income from discharge of indebtedness
Income from Discharge of Indebtedness
  • General Rule: income is recognized on a discharge of indebtedness
  • Exception when:
    • Discharge is a gift
    • Discharge is a bequest (forgiven through will)
    • Discharge occurs in bankruptcy
    • Discharge occurs when TP is insolvent and discharge does not make TP solvent (but, must reduce tax attributes)
    • Discharge is from student loan for certain approved post-education employment
exclusion for gain from small business stock
Exclusion for Gain from Small Business Stock
  • Noncorporate TP’s may exclude 50% of the gain on disposition of certain qualified small business stock:
    • must be issued after August 10, 1993
    • held more than 5 years
    • a C corporation with not more than $50 million of gross assets, with 80% of value of assets used in active trade or business
    • Cannot be professional services, financial services, hospitality, mining/oil/gas production
    • Exclusion limited to $10 million or 10 times basis of stock disposed of during year.
holocaust restitution payments
Holocaust Restitution Payments
  • Restitution payments received after 1999 by victims of Nazi persecution or their heirs or estates are not includable in gross income for federal income tax purposes
    • 2001 Tax Act change